The ink has dried, and now it's official: Watson Pharmaceuticals ($WPI) has agreed to buy its Swiss-based rival Actavis. The price--€4.25 billion ($5.6 billion) up front, plus a potential €250 million worth of stock in milestone payments--was about what the gossips expected, a total of $5.9 billion.
There are plenty of reasons to applaud the combo: It will give Watson additional heft in the margin-shaving generics market, plus send it deeper into international markets, both in Western Europe and in emerging markets such as Eastern Europe and Russia.
The immediate earnings accretion (Watson predicts more than 30% for 2013), combined with $300 million in costs Watson expects to cut over the next three years, inspired several analysts to significantly raise their price targets for the stock. J.P. Morgan and Citigroup call it a "transformational"-slash-"transformative" deal. And Watson, like other generics-makers, needs one with the influx of megablockbuster knockoffs dwindling over the next several years.
But no deal is without its disadvantages. Leerink Swann raised its target and said the deal "makes a lot of sense." But the firm figures "sustainable growth" for the combined company could be tough, because of ongoing pressure on European pricing. And as The Wall Street Journal reports, Needham points out that the EPS accretion derives from favorable financing and Actavis' "substantially lower" tax rate. The company is based in Zug, a Swiss tax haven that has attracted a host of corporate headquarters.
The companies themselves say integrating will be easier because of Actavis' experience with absorbing acquisitions. The company was cobbled together, deal by deal, by Icelandic businessman Thor Bjorgolfsson, who's now chairman of the investment firm that's Actavis' largest shareholder.